Trading Uptrends with Charts
Stock Trading Techniques | Stock Trading Strategies | Trading Trends with Charts
Charting IIIn Charting I we considered the three most basic chart patterns - the uptrend, the downtrend and the trading range.
In Charting II we will look in more detail at how we could trade a trend profitably. In Charting III we look at how we could trade a range-bound stock profitably.
General Appearance of the Chart
It is possible to trade a trending stock using purely the general appearance of the chart.
The strategy is to buy stocks whose chart is sloping upwards and to sell if the slope ever turns downwards.
The trend you buy into must be observable within your favored trading timeframe.
A Stock in an Uptrend
Concrete Buy and Sell Signals
A common failing in beginning traders is a reluctance to sell stocks at a loss. If we allow beginning traders the luxury of exercizing discretion - as in trading the general appearance of the chart - it often leads to disaster.
As an beginning trader, you must set hard, objective buy and sell signals before you embark on any trade. If you want to trade using charts, the best way to do this is with trendlines.
Trend Lines
A trend line can be drawn when three peaks or troughs on a stock's chart all lie on the same straight line.
For uptrends, trendlines are drawn by connecting troughs - as shown above.
The trendline above was first drawn when points 1, 2 and 3 could be connected with a straight line. The stock's price graph has subsequently respected the trendline by touching it but not falling below it at points 4 and 5.
Most charts do not provide us with the opportunity of drawing perfect or near-perfect trendlines of the type shown here. It's advisable for beginning traders to restrict themselves to trading stocks for which they can draw perfect or near-perfect trendlines.
If you buy a stock that's trending upwards, the sell signal is obvious. You sell when the trend breaks - in other words when the stock's price closes below the trendline.